Hawke's Bay/Wairarapa Hill Country

Model Description

Historically MAF Policy has had two separate models representing Hawke's Bay/Wairarapa hill country, the summer dry model and the summer moist model. For the 2004 monitor year the summer dry and summer moist models have been merged, creating the Hawke's Bay/Wairarapa Hill Country model, on which the following commentary and budgets are based.

This model represents hill country properties from Wairoa south, through to Cape Palliser. Most farms represented by the model have a sheep policy running a breeding flock and rearing replacements. Lamb sales are a mix of prime and store, depending on the season, with most being sold for slaughter.

Approximately half of the properties run a breeding cow herd as part of an increaasing trend towards more flexible beef finishing policies.

Table 1: The Model in Summary 2003/04

Effective area:	511 ha	Total stock units wintered:	5,102 su
Opening stock wintered:		Breeding cows	114 hd
Breeding ewes	2,445 hd	R1yr cattle	129 hd
Replacement ewe hoggets	797 hd	R2yr cattle	99 hd
Other sheep	447 hd	Other cattle	24 hd

Table 2: Key Parameters

	2000/01	2001/02	2002/03	2003/04	2004/05f
Effective area (ha)	480	494	504	511	511
Opening sheep stock units	3,344	3,312	3,464	3,316	3,416
Opening cattle stock units	1,536	3,530	1,892	1,786	1,744
Opening total stock units	4,913	5,162	5,474	5,102	5,160
Stocking rate (su/ha)	10.2	10.4	10.9	10.0	10.1
Ewe lambing %	118	120	133	126	131
Average lamb price ($/hd)	60.19	68.80	59.00	62.56	62.91
Average wool price ($/kg)	2.72	3.01	3.09	2.75	2.73
Total wool produced (kg)	19,717	18,228	18,783	18,132	18,424
Wool production (kg/ssu)	5.9	5.5	5.4	4.60	4.60
Average R2yr steer ($/hd)	891	971	745	791	820
Average cull cow ($/hd)	822	873	615	645	605
Gross farm revenue ($)	319,928	364,227	392,796	366,430	383,870
Cash farm surplus ($)	121,851	122,725	114,120	101,630	111,316
Net trading profit ($)	121,206	164,109	100,934	90,140	102,355

Key Points

Hawke's Bay and Wairarapa farmers have experienced some extreme climatic swings during the year ended June 2004.
February rain caused exceptional summer pasture growth, creating a significant feed surplus for many farmers.
Lambing percentages are expected to be 5% higher in 2004/05 than in 2003/04 due to better mating weights and feeding over tupping.
Net trading profits are expected to increase by 13.6% in 2004/05 compared with the previous season.
Farmers are concerned at the rising cost of fuel and the flow-on effects this will have on farm expenditure.

Physical Factors

Hawke's Bay and Wairarapa farmers have experienced some extreme climatic swings during the year ended June 2004.

The season started on a poor note with a dry autumn in 2003 impacting on stock performance, affecting both expected lambing results and cattle weights. The Wairarapa region was more severely affected by this autumn drought than Hawke's Bay, with scanning percentages 10-15% lower on average.

The autumn dry broke in Hawke's Bay with rain in late February/early March. Pasture quickly recovered, and some excellent pasture growth rates were seen. Conditions in Wairarapa and Manawatu continued to be dry until May. This created buying opportunities for Hawke's Bay farmers with less competition for the available stock leading to relatively low prices during March and April.

During August the weather was very wet, creating poor conditions for pasture growth. In late August heavy rains and cold temperatures caused significant lamb losses in areas where lambing was occurring (around 5-13% for those affected).

September/October was cold and dry, which had a major impact on some stock performances. Lamb growth rates through to weaning were reduced in Hawke's Bay, with many farms being 20-30% behind target. In Wairarapa lower lambing percentages reduced the effective stocking rate and so lamb weaning weights were close to normal levels.

Summer presented a virtual heat wave with exceptional temperatures causing farmers to move quickly to reduce stock numbers. This had a major cost when February rain arrived.

February rain caused unexpected summer growth and generally created a problem of feed surpluses on many farms. The heavy rains from 15-17 February resulted in sporadic damage to tracks, flood gates and some slipping, but the extent of the damage was very localised.

Farmers attempted to utilise the February pasture growth by purchasing additional stock or making supplements. Many made late hay, baleage and silage to conserve the additional feed. For some farmers this was the first time they had made supplements in 15 years. Over 800,000 lambs were transported from the South Island to meet the demand for finishing lambs. Store lambs traded at a premium of 20% above the long-term ratio of store to schedule values, while cattle traded 4% higher during February and March.

The heavy February rains were followed by a period of very low rainfall in Hawke's Bay through March and April. This provided Hawke's Bay farmers with an opportunity to clean up the summer surpluses that had accumulated. It also meant that the surplus pasture was removed and pasture cover targets were generally achieved. In contrast, Wairarapa farmers had a more favourable autumn in 2004, with regular south-westerly and south-easterly rain providing sufficient moisture to maintain growth.

Late April/early May rain, combined with warm temperatures, resulted in excellent pasture cover. This has resulted in most farms being very well set up for the coming winter. The rain also provided welcome relief for new grass that had been sown for up to two months without achieving full establishment.

Financial Factors

2003/04 Review
(please note new model with no model for previous year for comparison)

Revenue

Compared with 2002/03, total revenue (sales less purchases) eased in 2003/04 to $366,430 or $717/ha. This decline in total revenue was a result of lower cattle revenue and, to a lesser extent, reduced sheep revenue.

Cattle revenue declined in 2003/04 to $103,320. The reduced cattle income was the result of lower farm operating prices, which averaged $2.98/kgCW for 2003/04 compared with $3.18/kgCW during the previous 12 months. These lower prices have been driven by an appreciating New Zealand dollar:United States dollar (NZD:USD) exchange rate, which averaged 18.9% higher over the year. Higher United States (US) beef prices partially offset the higher exchange rate, with 95 chemically lean bull beef averaging USD1.12/lb during 2003/04 compared with USD0.99/lb during 2002/03.

The average lamb price stabilised in 2003/04 at $55/hd for ewe lambs and $77/hd for ram lambs. Heavier lamb weights due to lower lambing percentages, offset a 2% lower lamb schedule compared with 2002/03.

Overall sheep revenue was lower in 2003/04 than in 2002/03, at $190,394. This was because storms reduced lamb survival, resulting in a lambing percentage of 126%.

Table 3: Cash Farm Revenue ($)

	Actual 2001/02	Actual 2002/03	Estimate 2003/04	Forecast 2004/05
Sheep sales less purchases	185,540	203,668	190,394	216,600
Cattle sales less purchases	110,609	109,645	103,320	101,135
Wool	55,474	58,128	49,909	50,385
Other income	12,404	21,355	22,806	15,750
Gross farm revenue	364,027	392,796	366,430	383,870

Expenditure

Cash farm expenditure eased back in 2003/04 to $212,664, or $37.20/su.

Less money was spent on wages, fertiliser and shearing.

The decrease in wage costs is a reflection of the number of people employed within the new model rather than any decrease in average wage costs. The 2003/04 season saw general wage increases throughout New Zealand.

The decrease in fertiliser expenditure is due to the fact that farmers have generally completed the development that has been a feature of this model for the 2001/02 and 2002/03 seasons.

Shearing costs were decreased due to the reduction of sheep stock units caused by the amalgamation of the summer dry and summer moist models.

Net Result

The cash farm surplus eased to $101,630 or $199/ha in 2003/04, while the net trading profit eased to $90,140 or $176/ha. This is a result of the lower revenue in both the sheep and cattle accounts, as previously discussed.

Despite the strong net trading profit, the model reports a disposable deficit for the 2003/04 year of -$2,458. This is due to high principal repayments, drawings and capital purchases, consistent with previous years. This disposable deficit has been funded through new borrowing and off-farm salaries and wages.

The lower net trading profit has flowed through to a lower economic farm surplus, at $81,459 or $159/ha. Return on capital has eased to 2.7% as a result of a lower economic farm surplus and increased farm capital due to higher land values.

Hawke's Bay/Wairarapa Hill Country Profitability Trends

2004/05 Forecast

Revenue

Gross farm revenue is forecast to increase by 4.8% to $383,870 in 2004/05. This equates to $751/ha or $66.28/su.

Cattle revenue (net of purchases) is forecast to decrease by 2.2% to $101,135. Farmers are expecting to retain more cattle so less cattle will be sold, which offsets this decline. Sale prices for R2yr steers are expected to increase by 2% and replacement store prices are expected to follow a similar trend, resulting in trading margins similar to 2003/04.

The proportion of male cattle that are steers is expected to increase over 2004/05 at the expense of bulls. This reflects an industry wide trend away from bulls to steers, due to their perceived higher sale value and ease of management.

An increased lambing percentage is the key reason behind the higher forecast sheep revenue for 2004/05. Lambing percentages are expected to increase from 126% in 2003/04 to 131% in 2004/05. This is due to better tupping weights than in 2003 and the expectation of a more typical spring with less lamb losses. The total sheep revenue is expected to be 13.8% higher than 2003/04 at $216,600.

Grazing revenue is expected to continue to trend back with 2004/05 expected to be 24.2% lower. This is due to a combination of lower grazing rates paid by dairy farmers and less dairy stock grazed to poorer dairy returns.

Wool prices are expected to be $2.75/kg, creating total wool revenue of $50,385.

Expenditure

Total cash farm expenditure is estimated to increase marginally by 2.8% to $218,644. This is an increase of $12/ha from $416/ha to $428/ha.

Areas that will increase in expenditure are wages (4%), electricity (12%), fuel (14%), grazing (20%), regrassing (14%) and rates (9%).

These increases are expected to be offset by decreases in expenditure on hay and silage (35.3%). This is due to farmers' expectation of a more typical spring/summer without the need for hay and silage making to conserve surplus feed.

Interest paid is expected to increase (4.3%) due to higher interest rates as the Reserve Bank tightens the official cash rate (OCR).

Capital purchases are expected to decline from $19,994 to $16,500 (21.2%).

Net Result

The cash farm surplus for the 2004/05 is forecast at $111,316, 9.5% higher than in 2003/04. This increase is largely due to forecast increases in sheep revenue. Net trading profit for the 2004/05 year is forecast to increase by 13.6%.

The cash result for 2004/05 is budgeted to decrease by 90.4% to $2,004. This is mainly due to reduced off-farm income (-64.3%) and increased taxation to $15,746 compared with a tax refund of $1,621 in 2003/04.

The economic farm surplus is expected to increase by $24/ha to $183/ha in 2004/05. Return on capital is expected to increase from 1.2% to 1.5%. This is due to the 15% increase in economic farm surplus being greater than the forecast 2% increase in capital land value in 2004/05.

Issues and Trends

Higher mating weights and ample feed supply during tupping have contributed to a very strong outlook for scanning and lambing. Just how much influence the higher weights are going to have is still unclear, but generally scanning percentages are expected to be 5-15% ahead of normal.

This year has also seen a significant increase in the number of ewe lambs mated. Higher weights at tupping and higher pasture covers at mating have provided an opportunity for some farmers to mate more hoggets. This is also in line with a general trend towards increased hogget mating. The additional in-lamb hoggets in spring will create some additional issues in regard to lambing management.

Pasture covers in Hawke's Bay are marginally behind target, whereas they are 200-400 kgDM/ha above target in Wairarapa. This corresponds to pasture covers being 500-600 kgDM/ha above target at the same time last year.

Large scale bull operations are having difficulty sourcing lighter bulls (350-420 kgLW) to stock their wintering systems. The better growing conditions over summer have lead to higher cattle weights than normal (typically around 500 kgLW) and this, combined with lower numbers of calves reared last year, has contributed to the shortfall.

The rising price of fuel has raised concerns about the cost of inputs. Higher fuel prices are expected to result in increased cartage costs and increases in the cost of operating machinery. The influence of higher fuel prices on the cost of shipping is also expected to have some marginal impact on farm gate returns.

The returns from beef are expected to be stronger over 2004/05. Stronger demand from the US beef market for lean beef is the key reason behind this stronger outlook. The higher demand for lean beef is driven by an under-supply of lean beef and demand from markets that would normally source their beef from the Bovine Spongiform Encephalopathy (BSE) affected US.

The uncertainty surrounding the NZD is the factor most likely to impact on farm gate returns at present. The unpredictable nature of the NZD:USD exchange rate and a lack of clear signals are creating the biggest volatility in beef returns.

The majority of farmers surveyed expect land prices to stabilise this year. This is underpinned by lower demand for dairy runoffs as dairy farm returns are reduced, and also due to rising interest rates. The land price rises, to date, have been a major contributor to farmer wealth creation.

Demand for rental land is still high, with plenty of interest in those properties advertised. Rental rates have stabilised as market rentals and percentage of gross farm income determine rental rates, rather than a percentage of capital value.

The Holidays Act has created a degree of frustration among farmers. The view is that working conditions appropriate to an urban work force are being enforced on businesses that are biological in nature, whereas stock require feeding and regular monitoring, and cannot be turned off for public holidays.

The increasing levels of compliance recording that are required under the Holidays Act and Occupational Safety and Health Act are challenging some farmers' recording systems. It could be a number of years before these farmers are compliant with these Acts.

The use of nitrogen fertiliser has continued to increase and is expected to do so in the future. Nitrogen fertiliser supplies a relatively low-cost method of intensifying hill country, but could generate environmental issues if over-used.

The under-supply of skilled labour continues to influence the agricultural sector. Many farms are having difficulty sourcing senior staff and agribusinesses are having significant difficulty sourcing skilled individuals.

Farmers are increasingly concerned about the developing processing over-capacity in the North Island. The concern arises due to the perceived risk of poor profitability of meat processors and the chance that a processor could default in the medium term.